Last week, California Democratic Senator Dianne Feinstein introduced the “Patent Fee Integrity Act,” a bill that would prevent the diversion of user fees from the United States Patent and Trademark Office (USPTO) to general government accounts.

Conversant supports this legislation. As we shared in an open letter to Senator Feinstein:

We believe that strong, reasonable and ethical licensing of high-quality patents is healthy for knowledge-based economies.  Intellectual property enables innovation—it does not stifle it.  And patents exist to encourage, reward and protect the inventions that improve our lives.  Accordingly, a strong and properly functioning USPTO is vital to the interests of Conversant, our partners, and all inventors.

 Despite years of Congressional debate and discussion about the importance of a fully-funded USPTO, the agency still has neither full funding nor access to all of the user fees it collects. The “Patent Fee Integrity Act” would end fee diversion, thereby enabling the USPTO to improve patent quality and support in interests of inventors.  It would do all of this without adding to the deficit. 

What do you think of the Patent Fee Integrity Act? Do you agree that this important measure promotes the interests of inventors and innovation? Join the conversation in the comments below.

As the U.S. Senate considers new legislation aimed at curbing patent litigation abuses, voices are being raised in opposition. In February, a group of more than 150 businesses and organizations representing high-tech startups, independent inventors, and university researchers  sent a letter to Senate Judiciary Committee co-chairs Senator Patrick Leahy and Charles Grassley urging caution lest the resulting legislation inadvertently undermine the patent system that is so crucial to American economic growth.

Senators Leahy and Grassley also received a letter and 2,099-signature petition from the Independent Inventors of America, expressing “alarm at the current rush toward patent legislation that could cripple invention in America” by raising the “barriers to justice even higher than they already are.”

Consider the heartfelt article by independent inventor Randy Landreneau in the February 10, 2014 issue of the IP Watchdog blog.  Mr. Landrenaeu writes of the ways in which the just-passed House version of patent reform, known as the Innovation Act, would harm America’s startups and independent inventors.  He cites the Innovation Act’s “loser pays” provision, noting that this provision could put small businesses who seek to defend their patent rights from encroachment by big corporations at a distinct economic disadvantage in any court battle. In fact, it may make it financially too risky for them to stand up for their legitimate rights in court.

Mr. Landrenau also states  that the whole patent troll issue has been obfuscated in a fog of propaganda by certain Big Tech multinationals willing to weaken the patent system itself — and therefore future generations of American startups — if it means that by doing so they can reduce their own company’s litigation costs. Indeed, Mr. Landreneau rightly points out that this propaganda campaign is “based on highly questionable data” such as the claim that “the number of patent infringement lawsuits has risen dramatically due to the so-called ‘patent trolls.’”

Today’s patent litigation rate actually is less than one-half what it was during the golden age of American invention in the 19^th century Industrial Revolution. Patent and legal records from that time show that the patent litigation rate at that time — defined as the number of patent suits filed in a decade divided by the number of patents issued in that decade — reached 3.6 percent. In contrast, USCourts.gov figures show the patent litigation rate during the last decade was only about 1.57 percent. Today’s patent litigation rate is actually less than it was throughout the entire 70 years from 1790 to 1860 when it averaged 1.65 percent.

All of us who urge caution when enacting further patent reform must acknowledge, however, that there is a patent troll problem. As thousands of main street small businesses and Mom and Pop coffee shops can sadly attest, these ambulance chasers of the patent world are as real as they get, and have victimized thousands of small businesses in recent years (see my previous post “States Step Up Fight Against Patent Trolls”).

The issue here is that both claims are true. Patent trolls are real and a serious problem for small businesses across the United States and key provisions of the recently-enacted Innovation Act will unfortunately only harm legitimate inventors, not the patent troll bad actors who should be stopped.

For too long, many responsible patent owners have sought to avoid any discussion of the growing scourge of patent trolls, fearing it would only give ammunition to those who seek to eviscerate the entire patent system for their own business interests. But denying the truth because it might be employed wrongly is bad strategy. Better for legitimate patent owners to stand up publicly against patent trolls and support actions that will truly limit their abuses.

In a recent blog post, I wrote about the growing numbers of state legislatures and attorneys general who are pushing for the use of consumer protection laws to curb the widespread extortion of small businesses by patent trolls.  Now the White House has unveiled new initiatives to further curb patent litigation abuse and strengthen the patent system. At a public roundtable event February 20, the White House announced three new executive actions to be implemented by the USPTO:

1] Crowdsourcing Prior Art: To improve the quality of patents issued and reduce overbroad or invalid patent claims, the USPTO is undertaking a new initiative to help companies and interested citizens find relevant “prior art” (information showing whether an invention is truly novel or not) and make it available to patent office examiners. Private sector crowdsourced prior art research firms such as Article One Partners have already proven effective in helping companies invalidate patents after they are issued. Creating ways for companies and private citizens to locate such prior art and make it available to the USPTO early in the examination process could help better patents issue in the first place.

2] Better Technical Training for Patent Examiners: The USPTO will expand its program to provide better technical training to patent examiners by enabling volunteer engineers and technologists from industry and academia to provide their expertise to examiners. As retired Chief Judge of the U.S. Court of Appeals for the Federal Circuit Paul Michel told Federal Lawyer magazine last October, improved training could have a significant effect in reducing the number of vague and low-quality patents issued.  “Thirty years ago, the examiner corps was older and far more experienced,” Judge Michel told the magazine. “Many of them went to law school at night, paid for by the patent office — a program, by the way, that the patent office unwisely dropped a decade ago. [But today], examiner training is not what it needs to be. Few examiners [understand the] requirement for claim definiteness, enablement, and that the claims be no broader than the written description. This, just as much as inadequate review of the prior art for novelty and non-obviousness, is responsible for many of the poor-quality patents issued.”

These first two measures are intended to address patent quality.  Many, including the United States General Accountability Office point to patent quality as a major underlying problem behind patent trolls.

3] Pro Bono and Pro Se Assistance: To help make the patent system more accessible to independent inventors and small businesses, the USPTO will provide educational and practical resources to inventors who lack legal representation and appoint a full-time Pro Bono Coordinator to oversee the program. The USPTO also launched an online toolkit designed to help consumers and small businesses know how to respond to patent troll demand letters.

One clear benefit of these Administration moves is that they address the abusive behavior of patent trolls and weaknesses in patent issuance without risking the harm to the innovation system that could arise from overly-aggressive changes to patent law itself.  Gene Sperling, assistant to the President for economic policy, said that, while the administration “had no choice but to take action on patent trolls,” the White House also does not agree with all the features of the recently-passed Innovation Act in the House, which many believe include several draconian – and arguably less effective – changes to patent law.

For the full text of the White House press release on the new initiatives, click here.

Not too long ago, if you talked to a U.S. senator or congressperson about innovation policy, the eyes of all but a few would glaze over at the first mention of the word “patents” — widely considered to be among the most boring subjects in the world. The topic generated even less interest from constituents than local library bonds.

Today, however, many of the 535 members of the U.S. Congress have become ardent advocates of patent reform — as have an increasing number of the 50 state legislatures and attorneys general (AGs) in America. In fact, the AGs of Nebraska, Vermont, and Missouri met at a roundtable event in New York City in early February to discuss the patent troll problem.

What accounts for the sudden change?

In large measure, it’s due to the behavior of patent trolls such as MPHJ Technologies Investments LLC. The attorneys general of several states have alleged that MPHJ has engaged in deceptive practices by sending demand letters to thousands of Mom and Pop businesses, claiming they were violating MPHJ’s patent rights by using common scan-to-email technology. MPHJ then demanded these businesses pay up to $1,000 per employee or else face a patent infringement suit in federal court.

Naturally, many of these business owners started protesting loudly to their elected officials and demanding action — as did representative trade groups such as the National Federation of Independent Businesses and National Restaurant Association. In our view, the actions of patent trolls against small businesses have been a major factor in damaging the reputations of the majority patent owners and giving the patent system itself a bad name.

All of which helps to explain the flurry of activity recently both in Congress and at the state level to rein in these patent trolls.

At the federal level, the Innovation Act (H.R. 3309), passed late last year in the House, does try to address patent troll behavior. But it also contains provisions that harm legitimate innovators, especially startup businesses. We’ll discuss these concerns in future blog posts as the Senate begins marking up its version of the bill.

At the state level, AGs have found consumer protection laws to be very effective tools in fighting patent trolls. As Massachusetts Attorney General Martha Coakley recently said:

“State consumer protection laws prohibit false, misleading, deceptive, and unfair statements in commerce.  When a patent troll sends a letter to a small company, non-profit, start-up, or even a well-established company that asserts claims to property that the troll knows to be false, or threatens legal action that the troll has no intent of bringing, in order to extort money, that is against the law.”

To date, the AGs and state legislatures in nine states (and counting) have filed suits and drafted laws taking aim at patent trolls.

Vermont Attorney General Bill Sorrell was the first to use his state’s consumer protection law to combat the abusive practices of patent trolls, who often hide behind an alphabet soup of shell companies. His May 2013 lawsuit against MPHJ — and the state legislature’s later passage of the “Bad Faith Assertions of Patent Infringement Act” — quickly became a model for action in Nebraska, Massachusetts, Minnesota, South Carolina, Missouri, Oregon, and Kentucky.

But the biggest success so far may have been New York, where state Attorney General Eric Schneiderman signed a consent decree with MPHJ in January of 2013 requiring it to repay all the money it received from businesses in the state. In its demand letters to businesses, MPHJ had falsely claimed that it had analyzed each target company’s scanning systems and determined it to be in violation of its patents. In fact, MPHJ had merely sent form letters to hundreds of firms of a certain size and industry classification without uncovering evidence of infringement. (We note that many of the points made in the consent decree align with Conversant’s Patent Licensing Principles.)

What’s more, said Attorney General Schneiderman’s office:

“MPHJ falsely told businesses that most other businesses it had previously contacted had acquired licenses when in fact only a handful of businesses had done so. MPHJ also provided misleading information about the fees that the (few) prior licensees had paid. And MPHJ falsely threatened to sue hundreds of businesses if they did not respond to its letters within two weeks; in fact, it has never filed a patent lawsuit against a New York business.”

The National Association of Attorneys General has established a working group that will continue to work on methods of protecting businesses and consumers from patent trolls. The larger goal, says Massachusetts AG Martha Coakley, is to “thwart the abuse of the intellectual property system by bad actors while preserving the incentive to innovate.”

Mark Harris, writing in IEEE Spectrum, has an extremely well researched and insightful essay on The Lowballing of Kodak’s Patent Portfolio.  Harris compares the difference between the selling price of 1,730 of Kodak’s patents and the much higher earlier valuation – the amount their consultants had told them to expect.

As a Certified Patent Valuation Analyst, I know there are many different ways to value a patent portfolio, but they all boil down to a discounted cash flow analysis of how much licensing revenue you believe can be generated from it.  How much should one pay for a portfolio which should generate $100 million per year in royalties over the next five year?  Superficially, it’s a simple question.

Scratch the surface, though, and you discover a lot of hidden variables.  For example, pre-existing cross licensing agreements may place certain prospective licensees out of bounds for a given licensor – but not for others. Thus, the plausible expectation of the $100 million that you could generate is far too high for your prospective buyer, and he will value the portfolio at a lower amount than you have.  Furthermore, assumptions about the annual cost of obtaining that $100 million (mainly litigation), or a reasonable time period for negotiations to take place, often lead to significant differences in a valuation.

This is why valuations of those 1,730 Kodak patents ranged from $1.8 to $4.5 billion. But the various consultants who came up with these different numbers overlooked one of the fundamental truths of economics: The worth of a thing is what it will bring.

Nicholas Cage was painfully reminded of this fact when he sold his Rolex Daytona for $500 in Leaving Las Vegas.  When a buyer knows you’re desperate for cash, expect him to make a very low offer.  That’s precisely what happened to Kodak.  The bidders knew Kodak needed the sale to allow them to refinance their debt while in Chapter 11, and thus secured not only the original 1,730 patents, but a license to approximately 20,000 additional patents Kodak was hoping to retain.  In the end, the patents sold for only $94 million, or 2% to 5% of the amount Kodak was hoping for.

I have one quibble with Harris’ analysis: A filing to the bankruptcy court claims that $433 million of the $527 million payment from the IV/RPX consortium was in fact for a license to the approximately 20,000 patents Kodak wasn’t selling, meaning the 1,730 patents sold for $94 million.  While legally indisputable, I believe this simply reflects another valuation exercise, and the $94 million is artificially low.  But one certainly cannot claim that the whole $527 million was for the purchase of the patents, which is what numerous commentators said or implied at the time, so kudos to Mr. Harris for doing the digging to bring this fact to light.

The same thing can happen in reverse, of course.  Rockstar and Google may have been irrationally exuberant when they were bidding on the Nortel patent portfolio, driving the selling price past the $1 billion valuation to a staggering $4.5 billion.  It’s not hard to find people who think Rockstar overpaid, but maybe they’re just a better judge of value than the critics think.

The moral of the story:  No matter how accurate your valuation model, when the time comes to actually sell your portfolio, many additional factors can come into play which can significantly affect the final selling price.   Caveat venditor – let the seller beware!

You don’t have to look very far to find people who have characterized Google’s 2012 acquisition of Motorola Mobility and subsequent sale to Lenovo as a “mistake”:

• Associated Press: “An expensive mistake by Google could turn into a golden opportunity for China’s Lenovo Group”
• US News & World Report: “Google’s Big Bust: Motorola Mobility Sold to Lenovo for Huge Loss”
• Slate: “Google’s Prepared to Sell Motorola at a Huge Loss”
• Wired: “Google Selling Motorola at Multibillion-Dollar Loss”
• Current Analysis: “Lenovo Buys Motorola Mobility, Unraveling Google’s Mistake”

These articles represent a cross section of mainstream media, technology reporting, and even a market research firm focused on the mobile phone industry.  Did they really all get the story wrong?

Each article eventually mentions that Google is retaining most of Motorola Mobility’s patents, although you often have to get through several paragraphs before that fact emerges.  But the patents were what this deal was always primarily about, as evidenced by Google’s announcement after the acquisition and by this leaked email from Larry Page following the sale.

Let’s do some simple math.  Google acquired Motorola Mobility, including its approximately 17,000 patents for $12.4 billion in May 2012 (all figures in US dollars).  They sold the set-top box business (and 1,000 patents) to Arris in December 2012 for $2.35 billion in cash and stock.  And now they’ve sold the handset business (and 2,000 patents) to Lenovo for $2.91 billion.  Now, the purchase of Motorola came with $2.9 billion in cash, so what we’re left with is $4.24 billion for around 14,000 patents.  (You can shrink that number further by taking into account things like $2.4 billion in deferred tax assets Google obtained in the original acquisition, but we’ll set that aside for the sake of this argument.)

According to regulatory filings, Google had valued the original 17,000 patents at $5.5 billion (by far the biggest piece in their valuation of the acquisition).  Now, anyone in the patent licensing business will tell you calculating a per-patent valuation for a portfolio is an over-simplification. But with all necessary disclaimers, this works out to around $294,000 each, and that they paid $303,000 each for the 14,000 they still have.  That’s pretty close to their original valuation.

And does that valuation hold water?  Probably the easiest checkpoint is Rockstar’s purchase of around 6,000 Nortel patents for $4.5 billion.  That’s $750,000 per patent.  (Before you start thinking this means Google may have undervalued the Motorola portfolio, please realize that such a portfolio comparison would be a futile, apples to oranges exercise. And don’t go multiplying your portfolio by $750,000 or $303,000 to try and value it.  Free portfolio valuations are worth what you pay for them.)

The bottom line:  Google never thought the $12.4 billion was just for the patents, but they certainly believed they were the biggest part of acquisition, and any analysis of the sale to Lenovo which doesn’t put the patents front and centre is missing the point.

If you blinked you missed it, but President Obama gave a flyby to patent-related legislation in his State of the Union speech this week.  It was in a sentence that (to our ear) sounds like it was appended to a paragraph about innovation:

“We know that the nation that goes all-in on innovation today will own the global economy tomorrow.  This is an edge America cannot surrender.  Federally-funded research helped lead to the ideas and inventions behind Google and smartphones.  That’s why Congress should undo the damage done by last year’s cuts to basic research so we can unleash the next great American discovery – whether it’s vaccines that stay ahead of drug-resistant bacteria, or paper-thin material that’s stronger than steel.  And let’s pass a patent reform bill that allows our businesses to stay focused on innovation, not costly, needless litigation.”

The rub, of course, is legislating to address “costly, needless litigation” without needlessly raising the cost of all patent litigation and harming innovation in the process.  We’ve already made our view plain on this issue; that any changes need to be “crafted in a way that preserves an independent judiciary and are not overly burdensome for all patent owners.”  We’ll keep following the patent legislation as it works its way through the Senate and provide our thoughts in this blog.

Something that also struck us about the quoted Obama paragraph is the phrase, “the ideas and inventions behind Google and smartphones.”  We don’t think Google needed a plug during the SOTU, but there is it.  Why the sentence didn’t generally address two important technologies, as in “search engines and smartphones,” or call out leading American offerings in those fields, as in “Google and the iPhone,” we can only guess.

At Conversant, we license quality patents.  In recent years our acquisitions team has assessed more than 600 patent portfolios comprising more than 130,000 patents.  Yet after due diligence we have passed on all but a handful of these opportunities because they didn’t survive our comprehensive and rigorous analysis of infringement, validity, substantive patent prosecution issues, and return on investment. Consequently our portfolio of patents under management contains quality patents from some of the world’s strongest innovators.

That’s why we had to smile when we saw this recent list compiled by CNN, featuring some of the most absurd and obscure patents ever to be filed to the USPTO. They remind us that a patent, in order to have any value, needs to actually be usable by a target market. I doubt there will be much licensing revenue from a patent titled “WEARABLE DEVICE FOR FEEDING AND OBSERVING BIRDS”. After all, 2014 is the year of wearable technology, but I don’t think this quite fits the bill.

Enjoy!

Intellectual Asset Management Magazine has published its list of the Top 10 Intellectual Property Personalities of 2013. It’s important to note that the “personalities” are indeed a diverse (and prestigious!) cross-section of individuals, companies and even concepts (sovereign patent funds).

Yes, Conversant made the list. And we’re in good company. IAM also recognized Rep. Bob Goodlatte, author of recent patent legislation, incoming USPTO Deputy Director Michelle Lee, and John Veschi, CEO of our Ottawa neighbor Rockstar.

We’re pleased to see our recently-published Patent Licensing Principles spurring much-needed discussion about how the IP industry should be operating. What this recognition leaves us wondering, though, is what’s next for 2014? There’s no doubt that there is a wave of public attention and debate cresting over the IP industry. The question is: where are we headed? Will 2014 be a breakout year for our industry – and if so, what will be the major themes and trends emerging from the public debates around our business?

Share your thoughts in the comments below – let’s have a conversation about 2014.

Recently TIME magazine and Qualcomm published the results of a wide-reaching survey about invention and inventors. Over ten thousand people in 17 different markets were polled about a range of issues related to Imagination, innovation, and intellectual property. As an intellectual property officer, I see the TIME/Qualcomm poll is a fascinating deep-dive attempt to explore these and other issues.

The poll highlights a rich global awareness of patents, and a fundamental belief in the value of active patent systems. But respondents were equally dissatisfied with their local patent governance:

People in 14 of the 17 countries scored close to or well above 90% when asked if they were familiar with the idea of patents; only India (72%) the UAE (67%) and Kenya (42%) scored lower. There was similar accord (90% overall) that a robust patenting system is important in fostering inventiveness.

When respondents were asked which of the 17 countries in the poll did the best job of protecting intellectual rights, the U.S. won in a landslide, at 40%, with the next best finisher, Germany, clocking in at just 10%. Respondents in none of the surveyed countries—not even in the U.S.—were satisfied with their own government’s patent system, with 76% wanting even tighter protections.

The poll also sheds an enlightening perspective on the impact of the cell phone (71% believe it’s the most significant invention in history!) and identifies electronics overall as the hottest sector of innovation today:

Seventy-one percent of people polled said the cell phone was the most important invention in human history—­something the unknown inventor of the wheel and first master of fire might dispute—and they believed that’s more or less the wave of the future too.

In both developed and emerging countries, electronics and computer hardware were seen as the likeliest sectors for big innovation (at 23% and 22%, respectively), with health care and pharmaceuticals coming next (21% and 13%). The energy sector, which gets little love in most polls, finished at a respectable 15% in developed economies and 11% in emerging ones—with respondents perhaps learning from the big play China is making in the clean-­energy market. Most other sectors—­including aerospace, transportation and, alas, education—­finished in single digits.

The full report is a must-read, and a closer study for anyone involved in patent licensing. For a full view of the poll results, via infographic, click here; http://techland.time.com/2013/11/14/the-time-invention-poll/.